By now you may have heard about or seen a Facebook or Twitter share of the recent segment on John Oliver’s “Last Week Tonight” show, which discussed our screwed up 401(k) industry. Not exactly something you’d expect to get a good laugh out of, but in typical fashion, Oliver was able to make a not-so-entertaining subject extremely entertaining with a heavy dose of sarcasm and dry humor. Our take? He nailed it.
At blooom, we’re what’s known as a fiduciary (more on this in a second), which Oliver points out is an important thing to look for when it comes to truly non-conflicted investment advice. We represent what we hope will become the new normal in the industry at some point, although we understand that a change of this magnitude will take time. But until then, there are certainly things you can do to help yourself, which Oliver did a great job highlighting. Here are our thoughts on the main takeaways and a few things we’d like to add.
1) The best time to start is now…or maybe yesterday.
This really just comes down to math, but the power of compounding really is pretty incredible. If you start early, you’ll need to invest far less to end up with far more in retirement. But as Oliver mentioned, not everyone is in the position to save for their retirement. So how do you know if you are?
First and foremost, if you have a 401(k) at work, do whatever you can to contribute up to the full amount your employer will match. From there, here are your priorities from our point of view:
• If you have credit card debt or student loans, don’t contribute a dime more than the full match amount until that is paid down.
• If you have no debt and have enough in an easily accessible savings account to cover at least three months of your living expenses, contribute as much as you can above your employer’s match and get in the habit of increasing contributions by 1% each year until you’ve reached the maximum the IRS allows ($18k if you’re under 50, $24k if you’re over 50).
• If you don’t have a 401(k) at work but have no debt (other than mortgage) and an emergency fund that can cover three months of expenses, look into an IRA and reach out to one of our advisors for some direction on how to open one if you need it.
2) Use low-cost index funds and don’t pay attention to the markets
Not surprisingly, the vast majority of financial institutions continue to market high cost, actively managed products like they somehow perform better and are therefore better investments for their clients. Yet all the evidence seems to prove otherwise. And the case for low-cost passively managed index funds only gets stronger every year.
Instead of trying to beat the market or paying a fund manager a hefty and largely hidden fee to try really really hard to beat the market for you, just ignore the stock market and use an index fund, when possible. Investing for retirement is about retirement, not what the market does in the next week, month, or year. Stick to a long-term disciplined approach, or as Oliver says, “If you stick around doing nothing, while everyone around you f*&%s up, you’re going to win big”. And we don’t have to just take his word for it. John Bogle, founder of Vanguard, along with dozens of other investing icons, famously makes the exact same argument, albeit usually without an f-bomb.
3) If you have an advisor, make sure they are a fiduciary
100% agree. To add to this, make sure he or she is NOT dually registered, which gives them the ability to take off that fiduciary hat in order to sell you a product he or she will benefit directly from. For more on this, here’s a quick explanation from the Jargon Translator. And when it comes to help with your 401(k), give blooom a shot. We ARE a fiduciary and have zero incentive to do anything that is not solely in YOUR best interest. In fact, unlike most firms, we’re required by law to always put our client’s interests ahead of our own.
4) Become more conservative as you get closer to retirement
We’re firm believers that once you’re within twenty years of retirement, you should begin to introduce bonds into your retirement account. Until then however, a globally diversified portfolio of stocks is the way to go. Blooom’s automated algorithm takes care of this gradual change for our clients to become more conservative as they move closer to retirement.
5) Keep fees low
Fees come in a few shapes and sizes, but I am going to talk about two. The first is the fee you pay someone to manage your account. Blooom, unlike most other advisors, prices our fees in dollars and not a percentage of your balance, which keeps your fees low and straightforward instead of increasing along with your balance over time. The second type are the fees associated with the funds you select in your 401(k). We call these hidden fees because most people don’t know that such fees exist and they are almost impossible to find on your investment statement. Blooom, however, knows these can be a huge drain on your portfolio so it is the reason our algorithm considers and chooses the lowest fee option available when selecting which funds to invest in for you. This goes back to point number two – low cost funds not only save you in hidden costs, which can add up to hundreds of thousands of dollars over time, but they also actually perform better in the long-run.
If you haven’t seen John Oliver’s segment yet, check it out here. It’s well worth your time.